Why Dow Jones Laggards Are Important Leading Indicators

Submitted by Abby Joseph at Profit Confidential as part of our contributors program.

There very well could be more upside in the Dow JonesIndustrial Average.

Many components have been underperforming the stock market significantly; if there is to be any real economic recovery, these companies should feel it.

As an index, the Dow Jones Industrial Average seems a little out of date and not particularly reflective of today’s world or the rest of the stock market.

But regardless, it’s still the global benchmark, and ownership of both the index and component companies is vast.

Even though Merck & Co., Inc. (NYSE/MRK) is a great pharmaceutical company (and dividend payer), on the stock market, the position is back to where it was in 1997.

Another Dow Jones component looking for improvement is Hewlett-Packard Company (NYSE/HPQ), which has its own specific set of problems.

Then there’s Alcoa Inc. (NYSE/AA), which reports early. This stock market laggard is still trading at the same level it was in 1989, taking share splits into consideration.

And there are several other Dow Jones components that are laggards.

It’s pretty clear that institutional investors have made a profound bet on the safest blue chips, most evident in January and February.

While business conditions for a lot of companies are flat, both interest rates and monetary environments remain very accommodative. In addition, there are efforts being made regarding fiscal policies in many important economies.

China effected a policy to slow its frothy economy and real estate market, and it succeeded.

So, with many countries trying to get their fiscal affairs in order, the potential for genuine economic growth (in a year or two) is being cultivated.

If this came to fruition, then laggards within the Dow Jones Industrial Average should improve, and this could help the index with even more capital gains.

To me, the Dow Jones Transportation Average is an important leading indicator for the U.S. economy. (See “The Great Big Gamble: Can a Little Earnings Growth Turn into a Lot?“)

But for the long haul, investors are more likely to build positions in component companies of the Dow Jones Industrial Average.

Without question, this is a very difficult stock market in which to be a buyer. The reaping should almost be finished.

But if global economic data shows improvement over the coming quarters and the Dow Jones laggards start moving, then this would be a signal that the broader stock market could still go higher.

As a manufacturer of aluminum, Alcoa is an important leading indicator. Not specifically for the stock market, but for the global economy. Alcoa is one Dow Jones laggard to watch.